Economic Confidential, February 2008

NATIONAL

States May Receive Dollarized Revenue From Federation Account

By Abdulsamad Yusuf

The Federal Government and the 36 States may enjoy dollarised revenue from Federation Account if the policy is acceptable to the major stakedolders.

The Finance Minister of State, Mr. Remi Babalola, disclosed this at the January’s meeting of the Federation Account Allocation Committee (FAAC) that the Federal Ministry of Finance would engage the CBN to work out the modalities for effective implementation of the proposed payment of part of the revenue in dollars to both the federal and state governments.

Earnings from crude oil into the Federation Account are currently being monetized by the Central Bank of Nigeria (CBN) to the three tiers of government.

                Babalola disclosed that the states were expected to open special domiciliary accounts with banks of their choice under the new proposed policy, into which their allocations will be remitted.

                “We are aware of the recent pronouncement by the CBN regarding the proposal to pay states from the Federation Account in dollars. At the moment, the CBN fully monetizes the foreign currency receipts in the Federation Account to be shared among the three tiers of government. Under the new proposed policy, States would be free to monetize these balances into naira for local use at the ruling inter-bank rate. They may also utilise part of these to meet external obligations like opening letters of credit.

                “With this proposed policy, the CBN hopes to further deepen the forex market, promote financial market development and further assist financial institutions manage our external reserves more effectively and efficiently,” the minister explained.

                He, however, noted that the policy could not take off this month since the engagement of the stakeholders has not been carried out and also Presidency has not given proper directives.

                “However, in the process of realigning the nation’s fiscal and monetary policies, I wish to assure all of us here that the growth and stability of the nation’s economy will be of paramount consideration,” the minister added.

                Recently a national daily reported a circular containing guidelines for the dollar payments addressed to banks which that: “Sequel to the payment of the Paris Club, from the excess crude deductions from their statutory allocations in the process of effecting the payments, the following guidelines are to enable designated banks make refunds of excess deductions to affected states.”

The circular further added that “ The CBN shall transfer the US Dollar amount allocated to the respective states to the offshore FEM of the designated banks; The banks shall credit the domiciliary account of the beneficiary state with the amount allocated to them as soon as the accounts are created; Any interest accruing to the amount from the date the banks are credited by the CBN to the date the funds are paid into the domiciliary account of the state shall be transferred to the beneficiary. Furthermore, banks shall also pay appropriate interest on the balance in the domiciliary account pending utilisation of funds by the states.”

The circular stated that banks shall not be allowed to effect disbursement of funds from the accounts to their states in US dollar cash. Drawing from the accounts, it pointed out, shall be made in naira at the prevailing inter-bank exchange rate on the date of the request from the state. However, states can utilise the funds in their accounts to effect offshore payments in respect of eligible transactions including opening of letters of credit subject to appropriate documentation and authorisation by the state governor.

It was argued that besides strengthening the naira, the dollarisation of states’ allocation provides an additional instrument for effective liquidity management by the CBN. Given the fact that Nigeria earns dollar from its crude oil export, which constitutes more than 90 per cent of her earnings, if the apex bank disburses such funds to states in naira, it would have to print additional naira – thus pushing additional funds into the economy. This will naturally increase the demand for the dollar and weaken the naira, according to experts.

Supporters of the proposed policy thrust believe that it would deepen the forex market, promote financial market development, and improve the degree of integration among the domestic markets and with international markets.